The Opportunity Cost of Doing Business for SMEs in Africa

Adeniyi Ogunfowoke
While Small and Medium Enterprises (SMEs) contribute largely to the economic growth and sustainable development in Africa, access to credit remains one of the biggest challenges for them to thrive.
This article looks into the existing gap in financial inclusion in Africa, the hindrances of accessing financial services, opportunities for growth for SMEs, and the ease brought about by the entry of fintechs into the banking market.
The African economy has gathered momentum over the years, with an estimated increase of 3.8% of the real output growth in 2017. As the largest economies gradually strengthen, the 2018/2019 performance should reach 4.1% according to the African Development Bank. This economic growth and sustainable development has largely been contributed by Small and Medium Enterprises (SMEs). In Kenya for instance, SMEs contribute approximately 40% to the GDP and employ over half of the country’s workforce.
Yet, becoming a profitable SME in the continent is never a smooth sail for many. There’s the presence of stringent government regulations in several countries, though the flexibility of doing business in others is a force to be reckoned with. The World Bank has recognized Kenya as having implemented the most reforms in the region between June 2016 and June 2017. These include the reduction of the number of procedures required to register a business, as well as utilizing a single window system to reduce the time for import documentary compliance. Then there’s the implementation of iTax, an online platform that allows Kenyans to easily register their businesses, fill and pay corporate income tax among others.
Moreover, access to credit remains one of the biggest hindrances for SMEs in Africa to thrive. The major banks are mainly huddled in big cities, making it difficult for a predominant section of businesses in the rural areas to access formal financial services. Besides, there exists rigorous risk assessment requirements by financial institutions that tend to limit the number of businesses that can access credit. These requirements include but are not limited to collateral, which often proves cumbersome to acquire even when trying to access short term credit or simply, is non-existent.
According to Juan Seco, the Chief Operating Officer of JumiaPay, “Non-collateral loans are on the other hand quite expensive for most SMEs in Africa, with an Annual Percentage Rate (APR) that can go as high as 300% in Kenya and 240% in Nigeria.” The Central Bank of Nigeria records about 69 percent of SMEs who wanted to apply for loans but failed, due to fear of application rejection related to collateral requirements and other associated conditions attached to the loan approval processes such as bad scores.
Notably, the entry of Fintechs (Financial Technology) companies into the banking market in Africa, is gradually improving the process of accessing credit for SMEs. Jumia is one of the companies revolutionizing the sector with its Jumia Lending service, an initiative that provides working capital financing for short-term borrowers. These are vendors selling on the online ecommerce platform for at least six months, seeking to expand and grow their online business. The program aims at boosting financial inclusion in the continent, not only by providing sellers with an online visibility and a vast customer base; but also, with access to affordable working capital to boost their commerce.
Juan Seco notes that, “we understand the challenges faced by our vendors and SMEs in general, to access working capital financing. We have therefore, also partnered with some of the best institutions where we try to bridge the gap for sellers seeking long term credit facilities. With Jumia being in the middle, our lending partners have the security that the data of our sellers on Jumia, such as sales or customer ratings is accurate. In addition, we give them first lien on the sales on Jumia, so even though these are not collateralized loans, they are highly de-risked as we give them some control over the sellers’ cash flows. For our sellers, we understand they cannot afford to spend hours in
traffic and at the branch, so we digitize the onboarding process, so they can keep running their shops and not lose valuable income”.
Currently applicable in Kenya and Nigeria, and soon to be launched in other countries where Jumia has operations, the Lending Program involves a quick online registration process with feedback provided within 72 hours. Vendor applicants benefit from low interest rates of as low as 12% per annum, on the non-collateral loans with flexible repayment plans of between 1- 6 months.
“I am on the second loan and the process of paying back is quite efficient and flexible since you get to plan your installment deposits and manage it by yourself. I have managed to grow my business capital and gotten higher returns. When I lost funds and communicated the same to the lending team, they gave me a grace period to recover; a benefit that is not available on other lending facilities,” says Nauri Mwei, a vendor on Jumia.
The impression fintechs such as Jumia Lending are leaving on credit consumers and especially SMEs in Africa, is that of value add to their businesses. They are bridging a long existing gap in financial inclusion in relations to credit access, by providing a more transparent and seamless way of availing financial services to a wider range of consumers in the continent.
Credit: Josephine Wawira

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